500. But any technical adjustment you make to NETA arrangements will actually influence the market place, will it not?
(Mr McCarthy) It will influence the market place and we will be interested in the environmental effects, but we are not actually ourselves going to do the measurement of those environmental effects. We will use another branch of government, namely the Environment Agency, to do the measurements.

Chairman

501. How, in practice, have you used that material? Can you point to any examples where you have used that material?
(Mr McCarthy) We have been concerned about the way in which the Environment Agency's carbon bubble, emissions bubble, has been used in terms of generating plant. That has been a particular concern, yes.

Chairman: We will now move on to embedded generation.

Mr Thomas

502. I was listening to a radio programme about three weeks ago on domestic CHPI think it was Costing the Earth or something like thatand it was praising or promoting the idea that the individual consumer will be able to put a gas turbine in their garage to produce heat and electricity for the house. As I have a gas boiler which is over 20 years old, I would like to do that pretty quickly. Will I be able to sell the electricity to the grid?
(Mr McCarthy) In the future, once domestic CHP has been introduced, yes. It is going to be important that there is a means of properly measuring both your imports and exports and rewarding you appropriately.

503. When will that happen? When can I do that? When will I be able to get money out of my gas turbine?
(Mr Scott) I share your interest, if I may say so, because I think it is a very exciting technology; it is a landmark really in generation. It is one of the priority tasks of the joint group which is meeting at the moment. We have six work streams and one is dedicated to this domestic CHP. We have invited one of the manufacturers marketing one of the products to chair the group, and I think they will bring through solutions during this year. I believe we have three things to crack. There are the technical issues, and there are a number of those; there is the question of the connection agreements and the contract for having such a device in your home; and the third is around the metering, the tariff and the settlement systems. If we bring those together, many of the hurdles which are there at the moment will be dismantled and we will be left with the difficulty of the people marketing these products to make it easy for you and me, if we are going to do that, to go down this route. You do need the skills of a gas fitter, an electrical fitter and a meter mechanic, and we really need those in one person.

504. Those are technical issues but what about Ofgem's role? The Committee went to Germany to look at what they were doing with renewable energy and embedded generation, and we saw very clearly there that you can install a PV on your roof and you can sell the electricity back to your grid, no problem whatsoever. Why can Germany do it now and you are talking about technical difficulties to be overcome in the future?
(Mr Scott) I think it is very important we pave the way now, not with any kind of quick-fixes or immediate incentives, but we really get the platform right for this technology, so we do not have on-going regulatory interference, if I can call it that, or incentives pushing or pullingor the Government for that matter. What we have seen in some European countries is that where they have gone in rather hastily they are now regretting it; which I think is what we are seeing in Denmark where the reports I see indicate deterioration in quality of supply, we have seen them cancelling large wind projects

505. That is political change. They are not technical reasons, it is political.
(Mr Scott) No, there are technical reasons. In Denmark, they have ended up in a situation where the total amount of wind generation exceeds the minimum demand on the power system, so there is a surplus of generation. As you know, there is nowhere to store electricity

506. It is quite an enviable position to be in though, is it not?
(Mr Scott) Not really. The Danish grid operator saw this as a looming disaster at the end of last year. The phrase from them was, "We have no more than a phone number for these wind farms", and clearly that is no way of running a power system. It is very important we put the foundation in place carefully.

507. That is fair enough, but my example was Germany, where they do not have that problem. You mentioned earlier the working group, this is the Embedded Generation Working Group I assume, the task force which is looking at these issues. Can you tell the Committee how up to date that is and how you are pursuing that work? We understand there were 14 key milestones set out for that group, five of them were to be completed by January this year. Have they all now been completed?
(Mr Scott) If I remember from the original Embedded Generation Working Group, which was an exploratory group, setting signposts for the way forward, they came out with something like 30 actions. That is my recollection. A lot of detailed work has to be done before those things could be implemented. What we have put in place now, and it is certainly up and running, is a main co-ordinating group jointly chaired by Neil Hurst from the DTI and John Neilson from Ofgem. There is a supporting technical steering group where most of these actions are being addressed. The reason they are not quick things to solve is that they are cross-party issues from the customer to the generator to the network operator to the regulator and so on. We have categorised the work into six work streams, each led by a senior manager from the sector. The work ranges from the micro-generation we have just talked about through to industry, skills and resources.

508. I take it from that reply that in fact what this group has done is thrown out the old timetable and is working in a different way. That is a reasonable conclusion, is it not?
(Mr Scott) "Thrown out" would not be right.

509. Perhaps not thrown out, but you are not sticking to that original timetable.
(Mr Scott) We had a meeting of the group only last Friday, and one of the agenda items was presenting a progress report. The whole exercise is on a project basis with an independent project co-ordinator, and that included a schedule of the original working group tasks and a timetable, and we are well on track within all of those.
(Mr Neilson) Some of them are ahead. For example, in March when Ofgem published its decision document about connection charges for embedded generation, we were able to make a significant advance in terms of improving the prospects for a fairer regime for embedded generators by moving to a shallow connection charge initially for distributed generation with annual distribution charges thereafter. So a number of steps have already been taken. What we have discovered in following up in great detail the report from last year is that there is a great deal of work to be done which needs to be planned systematically. Some of the work from the last report was embryonic, what we have brought together is all the interested parties so that together we are going to make very substantial progress, and certainly we have committed substantial resources to that.

510. Who is monitoring that progress?
(Mr Neilson) Ofgem and DTI are jointly responsible, and so we are monitoring it. We are employing people from ETSU to do the detailed project management reporting to this group, which contains a wide variety of industry figures as well as departments.

511. Do you publish committee reports?
(Mr Neilson) Yes, there will be an annual report to ministers and to the Authority. Within a few weeks there will be a website from this group on which considerable material will be published about the work in progress.

512. You are aware the PIU Report said that if this nut was not cracked, particularly by the 2005 Price Review, then the whole 2010 renewables target, the CHP target, the whole thing would be in jeopardy? "Jeopardy" was the word used by the PIU Report. Are you absolutely confident that you are on target to do that?
(Mr Scott) I think there is plenty of evidence to show that the work is really taking place and the right people are engaged, but having said that, part of the work must be to identify any pitfalls and barriers which remain or do not seem to be being addressed. There are a number of issues. This is not an easy challenge. Some of them are directly under the remit of the group to address, the technical issues, for example, the skills issues, but there will also be issues around planning consents for example, which could be material.

513. What would you say to the criticism that you were all project work and no action?
(Mr Scott) I think I would say you cannot do too much planning, and it pays off in the long run. I would stake my experience on that.
(Mr Neilson) I would say there are a considerable number of actions which have been taken.

514. You have mentioned one.
(Mr Neilson) I can go through six or eight of them, if that would be helpful.

515. Can you mention two or three of the main actions which you think would help embedded generation, which you have taken as Ofgem?
(Mr Neilson) The biggest one we have done is in March we changed the connection charge regime for distributed generation. We are making proposals which the DTI will need to legislate on in the next few months about reimbursing initial contributors, so where the people who have built distributed generation in the past have paid connection charges which have built network facilities and other people want to share those, we are putting in place a much fairer regime so that second-comers pay their fair share, which will be a much better basis for distributed generators moving forward. We are also making the distribution network companies reduce connection charges where that new connection means the distribution company can reduce the other investment that is required on its network. We are making much more comprehensive information available to distributed generators from the network operators, so instead of it being a secretive and difficult process for people who are planning distributed generation, we are requiring the network operators to publish much more information.

516. And all these things will be up on the web before long and the monitoring of them will be there?
(Mr Neilson) All these things were published in our document in March, which is already on our website.
(Mr Scott) Could I add one more, if you are watching our website? We mentioned the consultation documents which come from Ofgem, one went on the website today. It sounds a bit dry but it is about the governance arrangements for the technical standards which underpin all distributed generation and to make sure all parties, particularly the small players, can influence those.
(Mr McCarthy) There are wider things we are also doing, because one of the concerns we have is to ensure when there are small distributed generators they can have access to the network, and we are changing some of the rules for access of a general nature designed to ensure that that happens. It is not a position which would otherwise occur, since there are, as it were, special rights for the incumbents which necessarily reflect the historical position.

517. Do you take a long-term view about the future of the distribution networks in this country as to the importance or otherwise of embedded versus a traditional distributor network?
(Mr McCarthy) Absolutely, because one of the things we are probably more conscious of than any other organisation is the scale of what is involved. At the moment, if you take any distribution company it has probably got throughout its network something like 300 embedded generators. If we are going to get the degree of change which the Government's target implies, we are going to have 300 embedded generators for every sub-station, and our concern is to ensure that can happen. That can happen with firm rights for people, with security of supply and the lights staying on. Those are things we are tackling very seriously and very hard.

Chairman

518. You said that in your Embedded Generation Working Group you have 14 milestones and that you would comment on five of these by January of this year. Has that been done?
(Mr Neilson) I think the information will go up on the website in a few weeks' time. When we had our meeting last Friday we went precisely through the Embedded Generation Working Group report, but as I have not got the information here today, can we send you a note about that please?

519. Okay, but
(Mr Neilson) The information was discussed by the Group last Friday.